In a co-production arrangement, a U.S. vendor contracts with one or more companies in the buyer country to assemble, build, or produce articles related to the underlying sale. In a subcontracting arrangement, a U.S. vendor agrees to buy goods or services related to the underlying sale from suppliers in the buyer country. Co-production and subcontracting offsets appeared in 20% of the transactions reviewed by GAO.1 Example (co-production): In 1991, the government of South Korea and General Example (subcontracting): As part of its sale of Apache attack helicopters to the In this variety of indirect offset arrangement, the prime contractor agrees to purchase goods and services unrelated to the aerospace item sold. According to GAO, this form of offset was present in 9% of the transactions reviewed.21 Example: Lockheed Martin, as part of its sale of C-130 aircraft to Canada, agreed to purchase assemblies and avionics in Canada for another transport plane, the C-5.22 In this form of offset arrangement, a U.S. vendor transfers technology, technical assistance, or training to the buyer country. The technology may be related or unrelated to the 18ld. 19Lora Lumpe, Sweet Deals. Stolen Jobs, The Bulletin of the Atomic Scientists, 30 (Sept./Oct. 1994). 20GAO: Offset Demands Continue to Grow at 7. "GAO Briefing (July 30, 1998). "GAO: Offset Demands Continue to Grow at 7. underlying aerospace item sold.23 In GAO's review, this form of offset appeared in 48% of the transactions studied.24 Example: Lockheed Martin Tactical Aircraft Systems, as part of its sale of F-16 fighter aircraft to South Korea, agreed to transfer manufacturing and assembly expertise, enabling South Korea to assemble from kits and manufacture many of the aircraft sold as part of the deal.25 In this form of offset. U.S. contractors help foreign companies penetrate U.S. and/or nonU.S. markets, either performing the service in-house or using outside consultants for this purpose. Such offsets were present in 23% of the transactions reviewed by GAO.26 Example: As part of its $3 billion sale of F/A-18 fighters, McDonnell Douglas agreed to provide international marketing assistance for the REDIGO training aircraft produced by the Finnish company Valmet Aviation, Inc.” In this form of offset arrangement, a U.S. contractor takes an equity position, provides start-up financing, or provides other services to support a new or existing business entity in the buyer country. According to GAO, such offsets appeared in 13% of the transactions reviewed.28 Example: As part of its sale of Apache attack helicopters to the United Arab Emirates, McDonnell-Douglas Helicopter Company entered into several joint ventures in the UAE, developing products, among others, to clean up oil spills and recycling printer cartridges used in photocopiers and laser printers.29 "For military aerospace articles, technology transfers either must be approved by the U.S. government as a foreign military sale or, if a commercial sale, must be duly licensed by the State Department. Dual-use aerospace items must be licensed by the Commerce Department in accordance with the applicable export regulations. 1992). 24GAO Briefing (July 30, 1998). 25GAO: Offset Demands Continue to Grow at 9. 26GAO Briefing (July 30, 1998). "Finland Signs On For $3 Billion F/A-18 Deal, Aerospace Financial News (June 19, 28GAO Briefing (July 30, 1998). "GAO: Offset Demands Continue to Grow at 10. Apart from a general consensus that offsets add to the cost of doing business and that unilateral regulation of U.S. companies would exacerbate the offsets problem,30 segments of the aerospace industry express differing views on the importance and impact of offsets.31 1. Labor Unions/Workers Labor unions take the view that U.S. prime manufacturers are on a course of permanent employment decline as a result of both mandatory offsets and voluntary foreign outsourcing of components and subsystems. According to this view, U.S. and European producers are trapped in a prisoners' dilemma, offering increasingly high offset concessions to conclude aircraft sales, particularly in Asia. In the short run, this sacrifices U.S. (and European) jobs. In the long run, it creates new foreign competitors that further erode employment in the United States. 32 Although domestic suppliers occasionally benefit from offsets in terms of increased market access, as in certain joint venture or co-production arrangements, they generally express several concerns about offsets. First, in a typical direct offset arrangement, prime manufacturers select foreign suppliers primarily because they generate credits against the manufacturer's offset obligations. When this happens, even competitive domestic suppliers lose sales. Second, technology transfers and other forms of offsets enable foreign suppliers to become more sophisticated and experienced, enabling foreign firms to compete against U.S. companies in other sales. Third, U.S. suppliers express concern that offsets requiring foreign outsourcing can lead to overcapacity in the market, depressing sales and eroding profits.33 3. Prime Manufacturers Prime manufacturers view offsets as a nuisance and as a cost of doing business internationally. In response to criticisms from suppliers and workers, prime manufacturers respond that offsets are an insignificant cause of job loss compared to reduced defense spending and industry consolidation. Prime contractors contend, moreover, that if they did not agree to offsets, they would lose sales to foreign competitors that did. Alluding to lost sales, prime manufacturers assert that "85% of something is better than 100% of nothing," and that offsets are 30 Community Meeting Tr. at 18. 31 1997 National Export Strategy at 57-58. 32Id. at 58. 33 See id. a necessary evil to maintain production in the face of diminishing demand.34 36 In 1994, GAO predicted that foreign government demands for offsets in military sales would increase3 and concluded in 1996 that offset demands had indeed grown. Countries that previously had demanded offsets were demanding more from prime manufacturers and were developing long term commitments to pursue industrial policy goals. Moreover, countries that previously had not asked for offsets had begun to require them as a matter of policy.37 In its 1997 report to Congress, the Bureau of Export Administration confirmed this trend, reporting continued increases in both new offset obligations and offset activities performed pursuant to existing obligations. According to the report, prime contractors entered into 45 new offset agreements valued at over $6 billion, representing a substantial increase in new obligations over past years, both in overall value and as a percentage of the related export contracts. The report also concluded that indirect offsets constituted an increasing percentage of the total." 38 The impact of these increasing offset demands on employment and sales in the aerospace industry is difficult to measure. First, job loss in the industry may be attributable to other factors, such as significant reductions in defense spending over the past decade and consolidation of the global aerospace industry. Defense spending in the U.S. has dropped from roughly $370 billion in FY 1987 to less than $240 billion in FY 1997.39 Western European nations have similarly reduced military spending, resulting in intensified competition between U.S. and European producers." This decrease, coupled with a world-wide recession in the demand for commercial aircraft, resulted in the estimated loss of 545.000 jobs between 1989 and 1995." Second, it is 34 Id. 35U.S. General Accounting Office. Trade: Offsets in Military Sales (Apr. 13, 1983) (GAO/NSIAD-84-102). 36GAO: Offset Demands Continue to Grow at 3. 37ld.; but see Mowery at 9 (acknowledging the increasing importance of indirect offsets but concluding that there is no evidence of increased offsets in recent U.S. military exports). "Robert E. Scott. The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry, Symposium Papers on Trends and Challenges in Aerospace Offsets. 2 (National Research Council Jan. 14, 1998) [hereinafter Scott, difficult to establish whether a prime contractor awarded a contract to a foreign competitor solely because of an offset or because the foreign competitor offered more favorable terms. Third, as discussed further in section III.B.1, vendors involved in offsets currently are required to provide information only on the broad industry category affected by the offset. It is therefore difficult to assess the employment impact of even reportable transactions. This problem is even more difficult in indirect offset transactions, where the impact on workers and suppliers is spread across non-aerospace industries. Notwithstanding these difficulties, Randy Barber and Robert E. Scott, in Jobs on the Wing, attempted to forecast the employment consequences of offsets and other trade practices on the aerospace industry. They predicted devastating losses of high wage manufacturing jobs. They also forecast that offset policies and increased foreign competition could place 250,000 jobs at risk in aerospace and related industries in the year 2000, and estimated that as many as 469,000 jobs could be eliminated by 2013.43 Focusing on direct offsets and other forms of outsourcing, Dr. Scott later narrowed his estimate, predicting that by 2013, offsets and other forms of foreign outsourcing could result in the loss of 46,083 direct aerospace jobs and 34,470 other jobs that provide inputs to the aerospace industry. This would equal 9.6% of aircraft employment in 1994.4 Dr. Scott contends that this is likely a conservative estimate, in part. because it focuses on the impact of direct offsets, which, according to the Bureau of Export Administration (BXA), are diminishing as a percentage share of total offsets. 45 Apart from employment consequences, offsets also have a detrimental impact on the supplier base in the aerospace and other industries. As with employment, the impact of offsets on suppliers is difficult to assess. Because vendors are required to identify only the broad industry category affected, suppliers often are unaware that offsets are the cause of business losses. Moreover, suppliers that are aware of the adverse affects of offsets may be reluctant to complain of offset practices for fear of undermining their relationships with prime contractors. The BXA has attempted, with limited success, to assess the impact of offsets on domestic suppliers. In its 1997 report to Congress on offsets in defense trade, BXA included results of its Competitive Enhancement and Diversification Needs Assessment Survey. The Commerce Department sends this survey to small and medium sized businesses, including subcontractors of major defense primes. Approximately 703 subcontractors, or 94% of those targeted, responded The Effects of Offsets]. 421997 Section 309 Report, Appendix B. +3Randy Barber & Robert E. Scott, Jobs on the Wing: Trading Away the Future of the U.S. Aerospace Industry, 2 (Economic Policy Inst. 1995) [hereinafter Jobs on the Wing]. "Robert E. Scott, The Effects of Offsets, Outsourcing, and Foreign Competition on Output and Employment in the U.S. Aerospace Industry, supra, at 14. +5 Id. at 14-15. |